Repo Rate Cut Explained: Impact on Home and Personal Loans

 

Repo Rate Cut Explained: Impact on Home and Personal Loans

Today's RBI rate reduction is viewed as the beginning of a rate-cut cycle, potentially resulting in a gradual decrease in the interest rates that banks apply to loans.

With the Reserve Bank of India (RBI) reducing the repo rate by 25 basis points to 6.25 percent, interest rates on new loans are expected to decrease. Notably, this is the first repo rate cut in almost five years.

As short-term funding becomes more affordable for banks, interest rates on personal loans for retail borrowers may also decline in the coming weeks.

The 25-basis-point reduction in the repo rate is considered the beginning of a rate-cut cycle. Generally, banks lower interest rates on floating loans, such as home loans, that are tied to repo rates.

These loans are regulated by the marginal cost of funding-based lending rates (MCLR), which comprise deposit rates, repo rates, operating expenses, and the cost of maintaining the cash reserve ratio.

MCLR, or the marginal cost of fund-based lending rate, is the minimum rate at which banks are allowed to lend. In 2016, the RBI replaced the base rate system with MCLR-based lending rates.

Banks are not obligated to pass on the full benefit of a rate cut to borrowers. However, they usually share a portion of the advantage they gain from lower rates by reducing interest rates on loans.

It's important to note that personal loans have fixed interest rates, meaning they remain unchanged throughout the loan tenure. In contrast, home loans and car loans with floating interest rates are more susceptible to fluctuations.

Here is a comparison of personal loan interest rates offered by various banks:

• HDFC Bank: 10.85% – 24%
• ICICI Bank: 10.85% – 16.25%
• Bank of Baroda: 11.40% – 18.75%
• Kotak Mahindra Bank: 10.99% – 16.99%
• State Bank of India (SBI): 11.45% – 14.60%
• Punjab National Bank (PNB): 12.40% – 17.95%
• Axis Bank: 10.49% – 22.50%

These rates may vary based on factors such as credit score, loan amount, and tenure.

Only new personal loans issued by banks in the future will be offered at a reduced interest rate, while existing loans will continue at their current rates.

"Each bank follows its own policies. For new loans, banks are expected to pass on the benefit of lower rates, but for existing loans, such as home and car loans, the adjustment may take time," says Sridharan S, Founder of Wealth Ladder Direct.

"The RBI’s recent 25-basis-point repo rate cut, though expected, aims to reduce borrowing costs," says Kushal Rastogi, Founder & CEO of Knight Fintech.